Definition of “Financial Statement”
A financial statement is a written record or report of a company’s financial situation. This statement is made for interpretation by the stakeholders. Examples of a company’s stakeholders are: owners, managers, investors, creditors, government agencies, consumers, and the general public are considered external users. A good financial statement has all of these qualities and more: it is timely, dependable, objective, complete, and brief.
Components of a Financial Statement:
The IFRS based Financial Statement consists of four plus one statements: Statement of Financial Position; Cash Flow Statement, Statement of Profit or Loss, Statement of Change in Owners’ Equity, and Notes to the Financial Statement. Below is an explanation of the three most common statements.
Statement of Profit or Loss:
Statement of Profit or Loss ( income statement ) provides an overview of the revenues, expenditures, and expenses incurred for a given time period, typically a quarter or fiscal year. These documents reveal if a business can produce a profit by raising sales, cutting expenses, or doing both. Profit or loss statements are frequently displayed using the cash or accrual method. They are used by investors and corporate managers to assess a company’s financial condition.
Cash Flow Statement:
A cash flow statement’s goal is to give a thorough account of what happened to a company’s cash over a given time period, also referred to as the accounting period. Based on how much money is coming into and going out of the company, it shows how well a company can operate both in the short and long term.
Typically, the cash flow statement is divided into three parts:
Following the delivery of the company’s normal goods or services,
Operating activities describe the cash flow that results, including both revenue and expenses.
Investing activities include cash flow from purchasing or selling assets—think physical property, such as real estate or vehicles, or non-physical property, like patents—using free cash, not debt. Financing activities detail cash flow from both debt and equity financing.
Statement of Financial Position
A Statement of Financial Position is often known as a balance sheet. An organization’s assets, liabilities, and equity as of the report date are listed in the statement. As a result, it offers a snapshot of a company’s financial situation as of a particular date.
Given that a double entry accounting system allows for continuing adjustments to asset, liability, and equity accounts, this method is where the statement of financial position is most frequently given by businesses. The statement cannot be easily created if an entity instead uses a single entry accounting system; it must instead be created manually. Additionally, when the statement is written using the fundamental accounting principles required by the accounting frameworks, such as generally accepted accounting principles or international financial reporting standards, it provides more insightful information.
The statement of financial position is formatted in accordance with the fundamental accounting equation, which reads as follows:
Asset=Liability + Owners’ Equity.
This means that the totals for all asset line items are displayed first, followed by the totals for liabilities and equity.